Conserving for our future

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1 Annual Report 2014

2 BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES The consolidated financial statements of the Company, which are the basis for data presented in this report, have been prepared in accordance with International Financial Reporting Standards (IFRS) unless otherwise noted and are presented in millions of Canadian dollars unless otherwise indicated. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION This report contains some forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forwardlooking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as expects, anticipates, intends, plans, believes, estimates and similar expressions or negative versions thereof. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by the Company, including statements made with respect to the expected benefits of acquisitions and divestitures, are also forward-looking statements. Forward-looking statements are based on expectations and projections about future events that were current at the time of the statements and are inherently subject to, among other things, risks, uncertainties and assumptions about the Company, economic factors and the financial services industry generally, including the insurance and mutual fund industries. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements. Material factors and assumptions that were applied in formulating the forward-looking information contained herein include the assumption that the business and economic conditions affecting the Company s operations will continue substantially in their current state, including, without limitation, with respect to market prices for products provided, sales levels, premium income, fee income, expense levels, mortality experience, morbidity experience, policy lapse rates, taxes, inflation, information systems, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, continuity and availability of personnel and third party service providers, the Company s ability to complete strategic transactions and integrate acquisitions and that there will be no unplanned material changes to the Company s facilities, customer and employee relations or credit arrangements. Many of these assumptions are based on factors and events that are not within the control of the Company and there is no assurance that they will prove to be correct. Other important factors and assumptions that could cause actual results to differ materially from those contained in forward-looking statements include technological change, investment values, payments required under investment products, reinsurance, changes in local and international laws and regulations, changes in accounting policies and the effect of applying future accounting policy changes, unexpected judicial or regulatory proceedings and catastrophic events. The reader is cautioned that the foregoing list of assumptions and factors is not exhaustive, and there may be other factors, including factors set out under Financial Instruments Risk Management. The reader is also cautioned to consider these and other factors carefully and not to place undue reliance on forward-looking statements. Other than as specifically required by applicable law, the Company does not intend to update any forward-looking statements whether as a result of new information, future events or otherwise. CAUTIONARY NOTE REGARDING NON-IFRS FINANCIAL MEASURES This report contains some non-ifrs financial measures. Terms by which non-ifrs financial measures are identified include, but are not limited to, operating earnings, constant currency basis, premiums and deposits, sales, assets under management, assets under administration and other similar expressions. Non-IFRS financial measures are used to provide management and investors with additional measures of performance to help assess results where no comparable IFRS measure exists. However, non-ifrs financial measures do not have standardized meanings prescribed by IFRS and are not directly comparable to similar measures used by other companies. Please refer to the appropriate reconciliations of these non-ifrs financial measures to measures prescribed by IFRS. Annual Report 2014

3 COMPANY PROFILE Founded in 1847, Canada Life was Canada s first domestic life insurance company. Today, we provide insurance and wealth management products and services in Canada, the United Kingdom, Isle of Man and Germany, and in Ireland through Irish Life. In Canada, Canada Life offers a broad range of insurance and wealth management products and services for individuals, families and business owners from coast to coast. Our products include investments, savings and retirement income, annuities, life, disability, job loss and critical illness insurance. They are distributed through the distribution channels that Canada Life supports, including independent advisors associated with managing general agencies, as well as national accounts including Investors Group. Group payout products issued by Canada Life are distributed by Great-West Life. Canada Life is also a leading provider of creditor insurance for mortgages, loans, credit cards and lines of credit, through leading financial institutions and other lending institutions. In Europe, with roots dating back to 1903, Canada Life has operations in the United Kingdom, Isle of Man, Germany, and in Ireland through Irish Life. We provide individuals and their families with a broad range of protection and wealth management products. These include payout annuities, investment products and group insurance in the United Kingdom; investment products and individual insurance in the Isle of Man; pension products, critical illness and disability insurance in Germany; and insurance, pension and investment products to individuals, employers and affinity groups in Ireland through Irish Life. We provide asset management services through Canada Life, Irish Life Investment Managers and Setanta Asset Management. Operating through branches and subsidiaries in the United States, Barbados and Ireland, we are a leading provider of traditional mortality, structured and longevity reinsurance solutions for life insurers in the U.S. and in international markets. Canada Life is a subsidiary of The Great-West Life Assurance Company. Together, Canada Life, Great-West Life and London Life serve the financial security needs of more than 12 million people across Canada and had $371 billion in consolidated assets under administration at December 31, For more information on Canada Life, including current credit ratings, visit A member of the Power Financial Corporation group of companies. TM Table of Contents 1 Company Profile 2 Directors Report 5 Financial Highlights 6 Financial Reporting Responsibility Consolidated Financial Statements 7 Consolidated Statements of Earnings 8 Consolidated Statements of Comprehensive Income 9 Consolidated Balance Sheets 10 Consolidated Statements of Changes in Equity 11 Consolidated Statements of Cash Flows 12 Notes to Consolidated Financial Statements 92 Independent Auditor s Report 92 Appointed Actuary s Report 93 Participating Policyholder Dividend Policy 94 Participating Account Financial Disclosure 96 Participating Account Management Policy 98 Sources of Earnings 99 Subsidiaries of Canada Life 100 Five Year Summary 101 Directors and Officers 102 Policyholder and Shareholder Information Annual Report

4 Directors report Canada Life has been making and delivering on promises in Canada and Europe for over a century. Canada Canada Life, together with Great-West Life and London Life, serves the financial security needs of more than 12 million people approximately one in three Canadians. Our business is about helping improve Canadians financial, physical and mental well-being. Our customers rely on us to provide life insurance protection in the event of an untimely death in their family; disability benefits when they can t work because of accident or sickness; employee benefits that provide access to healthcare and dental care; and savings and investment products so they can meet their wealth management and retirement goals. In 2014, Canada Life, together with Great-West Life and London Life, with our staff and distribution associates, delivered on that commitment: Helping more than 40,000 families cope with loss, paying out more than $2 billion in life insurance claims Providing monthly income for 75,000 people who became disabled from work Paying over 50 million claims representing more than $4 billion in health and dental benefits for plan members Making over $800 million in payout annuity payments, helping Canadians fund their retirement with a secure income stream Continued strong performance In 2014, Canada Life, together with Great-West Life and London Life, grew organically while investing in initiatives that will strengthen our businesses and position them for growth in the years to come. Our companies achieved milestones in both sales and asset levels in our insurance and wealth management businesses, which strengthened our industry-leading positions in these segments. Our 2014 business performance reflects the value our customers place in the products and services we offer, through our advisors and distribution associates. For Canadians focused on their financial security, participating life insurance can offer important advantages and choice as part of a sound financial plan. Our companies have offered participating products for more than 123 years, and we have paid policyowner dividends every year since. In 2014, Canada Life paid out $215 million in policyholder dividends in Canada. Together, Canada Life, Great-West Life and London Life remain Canada s number one provider of participating life insurance. We are able to achieve this premier position through the support of our network of advisors. Canada Life s products are distributed through independent advisors associated with managing general agencies, as well as national accounts, including Investors Group. Canada Life is also a leading provider of creditor insurance in Canada for mortgages, loans, credit cards and lines of credit through leading financial institutions and other lending institutions. We operate in a highly competitive and changing landscape. To continue to grow organically and create value for our stakeholders, we will continue to encourage a culture of innovation and strengthen our ability to provide innovative offerings for the marketplace. A workplace where people can perform at their best underpins our ability to advance our goals as an organization meeting our clients needs and becoming their trusted partner in helping them to realize their own goals. Our companies were very pleased to be recognized as one of Canada s Top 100 Employers in The recognition affirmed our focus on workplace health and wellness, professional development and support for staff volunteerism. Engaging with our communities As an Imagine Caring company, in 2014, Canada Life, together with Great-West Life and London Life, donated $11.9 million to support the well-being of Canadians where they live and work. With a particular focus on mental health and well-being, we committed to supporting the advancement of mental health research and treatment in Canada with a donation to The Royal Ottawa Foundation for Mental Health; and invested in a new Mental Health Care facility in London, Ontario, a collaboration between local hospitals to improve mental health diagnosis and treatment options for people in southwestern Ontario. We continued our national, ongoing commitment to the Canadian Mental Health Association, enabling the Association to develop training and resources for organizations based on the Voluntary National Standard for workplace psychological safety. We also sponsored the first national psychological safety award recognizing an employer putting best practices in place and using the Voluntary National Standard to identify and reduce or eliminate psychological hazards in their workplace. Physical well-being is defined in large part by the world around us. For a second consecutive year, our companies took part in the annual Carbon Disclosure Project (CDP), an international, not-for-profit initiative helping companies disclose and take action to reduce their impacts on the environment. The strong score we achieved reflects our corporate commitment to sustainability and recognizes the contributions of our staff and advisors to our progress. 2 Annual Report 2014

5 Our submission was also recognized on CDP s Leadership Index, reflecting that measurement, transparency and continuous improvement are cornerstones of our approach to environmental management, and minimizing our environmental footprint is a key element of how we operate responsibly. Financial literacy is critical to financial well-being and making life decisions, like buying a home or planning for retirement. In 2014, we sponsored the Chartered Professional Accountants of Canada s award-winning financial education community program. Our support will ensure faster and broader dissemination of free and unbiased financial literacy education to new Canadians, Aboriginal Peoples, small and family-owned businesses and non-profits. Key to supporting the well-being of our communities is the growing engagement of our staff and advisors in robust United Way campaigns, food drives and countless other grass roots initiatives. In Canada, we re building for the future on a firm foundation of financial strength and stability, our commitment to employee engagement and supporting our communities, and relationships that put the customer first, through trust and partnership. Europe Leading in our chosen markets With roots dating back over a century, our companies in Europe have proud histories of delivering on promises. In the United Kingdom, Isle of Man and Germany, we operate under the Canada Life brand. In Ireland, with the integration of Canada Life into Irish Life, we operate under the Irish Life brand. Our reinsurance operations operate under our Canada Life and London Life brands. Today, we maintain leading market positions in our chosen markets and are continuing to invest in our diverse businesses. Coupled with a conservatively-managed investment portfolio, we have been able to make a consistently strong earnings contribution to our parent company s ongoing success. Our regulatory environment is always changing, and responding to these changes and fulfilling our regulatory obligations are an integral part of our business. Of particular importance is the emergence of a new European solvency regime that will impact most of our European and Reinsurance businesses. U.K. Canada Life has been supporting the financial security needs of customers and their families in the U.K. since As the market leader in the group risk market we are focused on meeting the needs of our group plan sponsors and on our group plan members. Reflecting the value we provide, we were named Best Group Risk Provider at the 2014 Corporate Adviser and Health Insurance Awards, and Best Group Protection Provider by ILP Moneyfacts. We are also focused on helping consumers meet their retirement income needs. We are building on our knowledge and expertise in payout annuities to develop innovative retirement income products and investing in technology to help our customers take advantage of the increased flexibility that is an integral part of the new U.K. pension savings landscape. In delivering these innovative retirement income solutions in the U.K., we will draw upon our parent company s significant global asset management capabilities. The investments we are making in our onshore and offshore investment bonds businesses will support us in maintaining our strong niche position. These investments in products and in technology to support both clients and advisors are critical to meeting our clients needs and delivering on our promises into the future. Our ongoing commitment to excellence and customer service was recognized, as we received a number of customer service and other awards, including Most Competitive Annuity Provider, Best International Life Group U.K. and Best Tax and Estate Planning Solutions Provider. Over $850 million of revenue premium and 2.7 million lives covered for group risk benefits Over 400,000 in-force payout annuity policies and over $1.8 billion in annuity payments Ireland In 2014, Irish Life marked 75 years of helping meet clients needs for financial security. From difficult beginnings, staff and advisors adapted, developed and progressed. We are the leading life and pensions company and deliver protection, pensions and savings products to clients across our Retail, Corporate and Investment Management businesses. Our recently launched Irish Life brand awareness campaign, supporting our integrated Irish Life business, has received very positive media and consumer response. Irish Life was once again recognized Best Life Company by the Irish Brokers Association. Our service offerings and technological capabilities earned us many other accolades during Our investment management companies, Irish Life Investment Managers (ILIM) and Setanta Asset Management, were well recognized again in Ireland as Investment Manager of the Year and Equities Manager of the Year, respectively. Also, for the first time, ILIM was recognized at the European Pensions Awards. Over 43 billion in assets under administration One million customers Germany The launch of Canada Life in Germany represented a fresh wind in the marketplace. Today, 15 years later, our brand continues to leverage three compelling attributes for German brokers and consumers strong roots, fresh winds and deep rivers. In 2014, our assets under management grew and we continue to be one of the leading insurers for unit-linked pension savings products distributed by independent brokers. Our ongoing investments in product development and distribution technology will help us continue to meet the needs of German consumers saving for their retirement. During 2014, Canada Life in Germany was named Best Life Insurer in a survey of independent distributors. We also continue to be well recognized for our broker service and distribution technology capabilities. Over $560 million of net cash flows in 2014 Annual Report

6 Reinsurance With operations in Canada, the U.S., Ireland and Barbados, our reinsurance businesses are broadly diversified by product type and by geography. We provide life and longevity reinsurance in the U.S. and Europe and property and casualty catastrophe reinsurance on a global basis. We also have a well-developed financial solutions capability that meets the capital management requirements of insurers operating in the U.S. and Europe. We continue to focus on building a leading, diversified business, supported by quality partnerships and solid underwriting discipline. Contributed earnings of $210 million from its diversified business Overall, our Europe and Reinsurance businesses are well positioned to drive profitable future growth, both organically and through acquisition, in our chosen markets. Retiring Directors honoured, new Directors appointed We thank the following individuals, who made a significant contribution to the Company. At Canada Life s 2014 Annual Meeting, four long-standing members of the Board of Directors announced their retirements: George Bain, Allen Loney, Raymond McFeetors and David Nield. George Bain had been as a member of the Board of Directors of since 2009 and was a member of the Audit Committee. He also served on the Boards of a number of European subsidiaries for the past 20 years. Following a distinguished 42-year career with the Company, Allen Loney retired as a member of the Board of Directors. Mr. Loney had been a member of the Board since May He served on the Executive Investment and Risk Committees, as well as on several of our European Boards. Mr. Loney also served with distinction as President and Chief Executive Officer from May 2008 to May He will continue to serve as Chairman and Director of a number of European subsidiaries. Raymond McFeetors had been a member of the Board of Directors since July He served on the Executive, Risk, Compensation and Governance & Nominating Committees as well as Chairman of the Investment Committee. From May 2008 to May 2013 Mr. McFeetors served with distinction as Chairman of the Board of the Company and its operating subsidiaries. David Nield had been a member of the Board of Directors since He served on the Executive, Compensation, Investment and Governance & Nominating Committees as well as Chairman of the Conduct Review Committee. He previously served as Chairman and Chief Executive Officer of the Company prior to the acquisition by Great-West Life. Mr. Nield continues to serve on several European subsidiary boards. Two new individuals were elected to the Board of Directors, namely Timothy Ryan and Siim Vanaselja. Mr. Ryan was a Director of the Company from 2010 to He was previously Vice Chairman of Regulatory Affairs for JPMorgan Chase & Co. Mr. Vanaselja is Executive Vice-President and Chief Financial Officer of BCE Inc. and Bell Canada. Building today for success tomorrow Our companies have long held responsible and ethical management as an intrinsic value. We believe it is essential to our long-term profitability and value creation for our stakeholders. In addition to meeting the standards set out in our Code of Conduct, we strive to minimize our environmental impact, and make a positive contribution in the communities where our companies are established. Our continued strong performance and focus on financial strength, together with our commitment to our employees and social responsibility, are the solid foundation from which we are positioned for growth in the future. Our goal is to meet our clients needs and be their trusted partner, leading to the achievement of superior financial results and greater shareholder value. On behalf of the Board of Directors, we take pleasure in recognizing the contribution of our staff and distribution associates across our organization, whose dedication, commitment and professionalism support our ability to continue delivering on our promises. Thank you. We also extend our sincere appreciation to customers and shareholders for your continued support. Jeffrey Orr Chairman of the Board Paul Mahon President and CEO 4 Annual Report 2014

7 FINANCIAL HIGHLIGHTS (unaudited) (in Canadian $ millions except per share amounts) For the years ended December 31 % Change Premiums and deposits: Life insurance, guaranteed annuities and insured health products, net $ 6,646 $ 5, % FINANCIAL HIGHLIGHTS (unaudited) Segregated funds deposits: (in Canadian $ millions except per share amounts) Individual products 8,702 5, % For Group the years products ended December % Change(6)% Proprietary mutual funds and institutional deposits 4,700 4, % Premiums and deposits: Total premiums and deposits (1) 20,167 15, % Life insurance, guaranteed annuities and insured health products, net $ 6,646 $ 5, Segregated Fee and other funds income deposits: 1, % Paid Individual or credited products to policyholders (2) 12,586 8,702 5,605 4, % Group products (6)% Proprietary Summary of mutual net earnings funds and attributable institutional to: deposits 4,700 4, % Total Participating premiums account and deposits (1) 20,167 15, % Net earnings before policyholder dividend (2)% Fee Policyholder and other income dividends 1, % Paid Net or earnings credited (loss) to policyholders - participating (2) account 12, , (37)%% Preferred share dividends (94)% Summary Common shareholder of net earnings attributable to: 1, % Participating Net earnings account $ 1,466 $ 1, % Net earnings before policyholder dividend (2)% Per Policyholder common share dividends % Dividends Net earnings paid (loss) - participating account $ $ (37)% 49 % Preferred Book value share dividends (94)% 12 % Common shareholder 1, % Net Total earnings assets $ 176,918 1,466 $ 161,816 1, % Proprietary mutual funds and institutional net assets (3) 20,736 16, % Per Total common assets share under management (3) 197, , % Other Dividends assets paid under administration (4) $ 41, $ 40, % Total Book value assets under administration $ 239, $ 218, % (1) (2) (3) (1) (4) (2) (3) (4) Participating Total assets account surplus $ 176, $ 161, % Non-controlling Proprietary mutual interests funds and institutional net assets (3) 20, , % Shareholders' Total assets under equitymanagement (3) 197,654 8, ,430 7, % Total Other equity assets under administration (4) $ 41,806 9,128 $ 40,042 8, % Total In addition assets to premiums under administration and deposits per the financial statements, the Company $ includes deposits 239,460 on $ proprietary 218,472 mutual funds and institutional 10 % accounts to calculate total premiums and deposits (a non-ifrs financial measure). This measure provides useful information as it is an indicator Participating account surplus $ 167 $ % of top line growth. Non-controlling Paid or credited to interests policyholders includes the impact of changes in fair values of assets supporting 80insurance and investment 67 contract liabilities. 19 % Shareholders' Total assets under equity management (a non-ifrs financial measure) provides an indicator of the 8,881 size and volume of 7,972 the overall business 11 of the % Total Company. equity Services provided in respect of assets under management include the $ selection of 9,128 investments, $ the provision 8,171 of investment advice 12 % and discretionary portfolio management on behalf of clients. This includes internally and externally managed funds where the Company has oversight In addition over to premiums the investment and deposits policies. per the financial statements, the Company includes deposits on proprietary mutual funds and institutional Other accounts assets to calculate under administration total premiums (a and non-ifrs deposits financial (a non-ifrs measure) financial include measure). assets where This measure the Company provides only useful provides information administration as it is an services indicator for of which top line the Company growth. earns fee and other income. These assets are beneficially owned by clients and the Company does not direct the investing Paid activities. or credited Services to policyholders provided relating includes to assets the impact under of administration changes fair include values recordkeeping, of assets supporting safekeeping, insurance collecting and investment contract income, liabilities. settling Total of transactions assets under or other management administrative (a non-ifrs services. financial Administrative measure) services provides are an an indicator important of aspect the size of and the overall volume business of the overall of the business Company of and the Company. should be considered Services provided when comparing respect volumes, of assets size under and management trends. include the selection of investments, the provision of investment advice and discretionary portfolio management on behalf of clients. This includes internally and externally managed funds where the Company has oversight over the investment policies. Other assets under administration (a non-ifrs financial measure) include assets where the Company only provides administration services for which the Company earns fee and other income. These assets are beneficially owned by clients and the Company does not direct the investing activities. Services provided relating to assets The under Canada administration Life Assurance include recordkeeping, Company safekeeping, collecting investment income, settling of transactions or other administrative services. Administrative services are an important aspect of the overall business of the Company and should be considered when comparing volumes, size and trends. Annual Report

8 FINANCIAL REPORTING RESPONSIBILITY The consolidated financial statements are the responsibility of management and are prepared in accordance with International Financial Reporting Standards (IFRS) for life insurance enterprises, including the accounting requirements of the Office of the Superintendent of Financial Institutions Canada. The financial information contained elsewhere in the annual report is consistent with that in the consolidated financial statements. The consolidated financial statements necessarily include amounts that are based on management s best estimates. These estimates are based on careful judgments and have been properly reflected in the consolidated financial statements. In the opinion of management, the accounting practices utilized are appropriate in the circumstances and the consolidated financial statements present fairly, in all material respects, the financial position of the Company and its segregated funds and the results of its operations and its cash flows and the changes in assets of its segregated funds in accordance with IFRS, including the requirements of the Office of the Superintendent of Financial Institutions Canada. In carrying out its responsibilities, management maintains appropriate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS, including the requirements of the Office of the Superintendent of Financial Institutions Canada. The consolidated financial statements were approved by the Board of Directors, which has oversight responsibilities with respect to financial reporting. The Board of Directors carries out this responsibility principally through the Audit Committee, which comprises nonmanagement directors. The Audit Committee is charged with, among other things, the responsibility to: Review the interim and annual consolidated financial statements and report thereon to the Board of Directors. Review internal control procedures. Review the independence of the external auditors and the terms of their engagement and recommend the appointment and compensation of the external auditors to the Board of Directors. Review other audit, accounting, and financial reporting matters as required. In carrying out the above responsibilities, this Committee meets regularly with management, and with both the Company s external and internal auditors to review their respective audit plans and to review their audit findings. The Committee is readily accessible to external and internal auditors and to the Appointed Actuary. The Board of Directors of the Company, pursuant to the Insurance Companies Act (Canada), appoints an Actuary who is a Fellow of the Canadian Institute of Actuaries. The Actuary: Ensures that the assumptions and methods used in the valuation of policy liabilities are in accordance with accepted actuarial practice, applicable legislation and associated regulations and directives. Provides an opinion regarding the appropriateness of the policy liabilities at the balance sheet date to meet all policyholder obligations. Examination of supporting data for accuracy and completeness and analysis of assets for their ability to support the policy liabilities are important elements of the work required to form this opinion. Annually analyzes the financial condition of the Company and prepares a report for the Board of Directors. The analysis covers a five year period, and tests the projected capital adequacy of the Company, under adverse economic and business conditions. Deloitte LLP Chartered Accountants, as the Company s external auditors, have audited the consolidated financial statements. The Auditors Report to the Policyholders and Shareholder is presented following the consolidated financial statements. Their opinion is based upon an examination conducted in accordance with Canadian generally accepted auditing standards, performing such tests and other procedures as they consider necessary in order to obtain reasonable assurance that the consolidated financial statements present fairly, in all material respects, the financial position of the Company and its segregated funds and the results of its operations and its cash flows and the changes in assets of its segregated funds in accordance with IFRS. Paul A. Mahon President and Chief Executive Officer William W. Lovatt Executive Vice-President and Chief Financial Officer February 12, Annual Report 2014

9 CONSOLIDATED STATEMENTS OF EARNINGS (in Canadian $ millions except per share amounts) CONSOLIDATED STATEMENTS OF EARNINGS (in Canadian $ millions except per share amounts) For the years ended December 31 Income Premium income For the years ended Gross premiums written $ 12,394 December $ 31 11,911 Ceded premiums 2014(5,748) 2013(6,428) Total net premiums 6,646 5,483 Income Net investment income (note 5) Premium Regular income net investment income 2,990 2,999 Gross Changes premiums in fair value written through profit or loss $ 12,394 5,374 $ 11,911 (2,018) Total Ceded net investment premiums income (5,748) 8,364 (6,428) 981 Total Fee and net other premiums income 6,646 1,305 5, Net investment income (note 5) 16,315 7,415 Benefits Regular and net expenses investment income 2,990 2,999 Policyholder Changes in benefits fair value through profit or loss 5,374 (2,018) Total Insurance net investment and investment income contracts 8, Fee and Gross other income 10,691 1,305 10, Ceded 16,315 (4,244) (4,743) 7,415 Benefits Total net and policyholder expenses benefits 6,447 5,665 Policyholder benefits dividends and experience refunds Changes Insurance in insurance and investment and investment contractscontract liabilities 5,825 (1,733) Total Gross paid or credited to policyholders 10,691 12,586 10,408 4,243 Ceded (4,244) (4,743) Total Commissions net policyholder benefits 6, , Policyholder Operating and dividends administrative and experience expenses refunds (note 30) 1, Changes Premium taxes in insurance and investment contract liabilities 5, (1,733) 96 Total Financing paid charges or credited (note to policyholders 16) 12, , Amortization of finite life intangible assets Commissions Restructuring and acquisition expenses (note 18) Earnings Operating before and administrative income taxesexpenses (note 30) 1,002 1,722 1, Income Premium taxes taxes (note 29) Net Financing earnings charges before (note non-controlling 16) interests 1, , Attributable Amortization to non-controlling of finite life intangible interests assets (note 22) (1) Net Restructuring earnings and acquisition expenses (note 18) 1, , Earnings Net earnings before - participating income taxes account (note 21) 1, , Income Net earnings taxes (note - shareholders 29) 1, , Net Preferred earnings share before dividends non-controlling interests 1, , Attributable Net earnings to - non-controlling common shareholder interests (note 22) $ 1, $ 927 (1) Net earnings 1,466 1,213 Net earnings - participating account (note 21) Net earnings - shareholders 1,429 1,154 Preferred share dividends Net earnings - common shareholder $ 1,415 $ 927 Annual Report

10 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in Canadian $ millions) For the years ended CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME December 31 (in Canadian $ millions) Net earnings $ For the years ended December 1,466 $ 31 1,213 Other comprehensive income (loss) Items that may be reclassified subsequently to Consolidated Statements of Net Earnings earnings $ 1,466 $ 1,213 Other comprehensive income (loss) Unrealized foreign exchange gains on translation of foreign operations Items that may be reclassified subsequently to Consolidated Statements of Earnings Unrealized gains (losses) on available-for-sale assets 195 (89) Income tax (expense) benefit (29) 16 Unrealized foreign exchange gains on translation of foreign operations Realized gains on available-for-sale assets 47 (27) 528 (40) Income tax expense 2 7 Unrealized gains (losses) on available-for-sale assets 195 (89) Total items that may be reclassified Income tax (expense) benefit (29) 16 Items that will not be reclassified to Consolidated Statements of Earnings Realized gains on available-for-sale assets (27) (40) Income tax expense 2 7 Re-measurements on defined benefit pension and other post-employment Total benefit items plans that may be reclassified (175) Income tax (expense) benefit 30 (41) Items that will not be reclassified to Consolidated Statements of Earnings Total items that will not be reclassified (145) 125 Re-measurements on defined benefit pension and other post-employment Total benefit other comprehensive plans income (175) Income tax (expense) benefit 30 (41) Comprehensive income $ 1,509 $ 1,760 Total items that will not be reclassified (145) 125 Total other comprehensive income Comprehensive income $ 1,509 $ 1,760 8 Annual Report 2014

11 CONSOLIDATED BALANCE SHEETS (in Canadian $ millions) December 31 Assets Cash and cash equivalents (note 4) CONSOLIDATED BALANCE SHEETS $ 1,543 $ 1,792 Bonds (note 5) (in Canadian $ millions) 55,226 48,497 Mortgage loans (note 5) 6,822 6,120 Stocks (note 5) December 2, ,565 Investment properties (note 5) , ,985 Loans to policyholders Assets 70,195 62,844 Funds Cash and held cash by ceding equivalents insurers (note (note 4) 6) $ 11,823 1,543 $ 10,566 1,792 Goodwill Bonds (note (note 5) 11) 55, , Intangible Mortgage loans assets (note (note 5) 11) 6, , Derivative Stocks (note financial 5) instruments (note 31) 2, , Owner Investment occupied properties properties (note (note 5) 12) 3, , Fixed Loans assets to policyholders (note 12) Reinsurance assets (note 15) 70,195 8,408 62,844 7,805 Premiums Funds held in by course ceding of insurers collection, (note accounts 6) and interest receivable 11,823 1,464 10,566 1,492 Other Goodwill assets (note (note 11) 13) 1, , Current Intangible income assets taxes (note (note 11) 29) Deferred Derivative tax financial assets instruments (note 29) (note 31) Investments Owner occupied on account properties of segregated (note 12) fund policyholders (note 14) 82, , Total Fixed assets assets (note 12) $ 176, $ 161, Reinsurance assets (note 15) 8,408 7,805 Liabilities Premiums in course of collection, accounts and interest receivable Insurance Other assets contract (note 13) liabilities (note 15) $ 1,464 77,866 1,145 $ 1,492 70,309 1,109 Investment Current income contract taxes liabilities (note 29) (note 15) Debentures Deferred tax and assets other (note debt 29) instruments (note 17) 1, Funds Investments held under on account reinsurance of segregated contractsfund policyholders (note 14) 82,083 1,946 76,326 1,476 Derivative Total assets financial instruments (note 31) $ 176, $ 161, Accounts payable Other Liabilities liabilities (note 19) 1,766 1,779 Current Insurance income contract taxes liabilities (note 29) (note 15) $ 77, $ 70, Deferred Investment tax contract liabilities liabilities (note 29) (note 15) Capital Debentures trust and debentures other debt (note instruments 20) (note 17) 1, Investment Funds held and under insurance reinsurance contracts contracts on account of segregated fund policyholders (note 14) 82,083 1,946 76,326 1,476 Total Derivative liabilities financial instruments (note 31) 167, , Accounts payable Equity Other liabilities (note 19) Participating Current income account taxes surplus (note 29) 1, , Non-controlling Deferred tax liabilities interests (note (note 29) 22) Shareholders' Capital trust debentures equity (note 20) Investment Share capital and insurance (note 23) contracts on account of segregated fund policyholders (note 14) Total liabilities Preferred shares , , , , Common shares 2,214 2,214 Equity Accumulated surplus 6,050 5,186 Participating Accumulated account other surplus comprehensive income (note 27) Non-controlling Contributed surplus interests (note 22) Total Shareholders' equity equity 9,128 8,171 Share capital (note 23) Total liabilities and equity $ 176,918 $ 161,816 Preferred shares Approved Common by the Board: shares 2,214 2,214 Accumulated surplus 6,050 5,186 Accumulated other comprehensive income (note 27) Contributed surplus Total equity 9,128 8,171 Total liabilities and equity $ 176,918 $ 161,816 Approved by the Board: Director Director Director Director Annual Report

12 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in Canadian $ millions) December 31, 2014 CONSOLIDATED STATEMENTS Accumulated OF CHANGES IN EQUITY Share capital Contributed surplus Accumulated surplus (in Canadian other $ millions) comprehensive income Total shareholders' equity December 31, 2013 Balance, beginning of Accumulated year $ 4,502 $ 83 $ 4,647 $ (251) $ 8,981 $ 68 $ 66 $ other Total Noncontrolling(1) Participating 9,115 Net earnings Share Contributed Accumulated 1,154 comprehensive shareholders' 1,154 account 59 Total 1,212 Other comprehensive capital surplus surplus income (loss) equity interests surplus equity income , , , ,874 Balance, beginning of Redemption year of Series $ 4,502 $ 83 $ 4,647 $ (251) $ 8,981 $ 68 $ 66 $ 9,115 Net D earnings preferred 1,154 1,154 (1) 59 1,212 shares (note 23) (3,500) (3,500) (3,500) Dividends Other comprehensive income Preferred 4, , , ,874 shareholders (227) (227) (227) Redemption Commonof Series D preferred shareholder (388) (388) (388) shares (note 23) (3,500) (3,500) (3,500) Issues of common Dividends shares to parent Preferred company (note shareholders 23) 1,412 (227) 1,412 (227) 1,412 (227) Balance, Common end of year $ 2,414 $ 83 $ 5,186 $ 289 $ 7,972 $ 67 $ 132 $ 8,171 shareholder (388) (388) (388) Issues of common shares to parent company (note 23) 1,412 1,412 1,412 Balance, end of year $ 2,414 $ 83 $ 5,186 $ 289 $ 7,972 $ 67 $ 132 $ 8,171 Noncontrolling interests Participating account surplus Total equity December 31, 2014 Balance, beginning Accumulated of year $ 2,414 $ 83 $ 5,186 $ 289 $ 7,972 $ 67 $ 132 $ 8,171 other Total Noncontrolling 13 account37 Total 1,479 Participating Net earnings Share Contributed Accumulated 1,429 comprehensive shareholders' 1,429 Other comprehensive capital surplus surplus income equity interests surplus equity income (2) 43 2, , , ,693 Balance, beginning Dividends of year $ 2,414 $ 83 $ 5,186 $ 289 $ 7,972 $ 67 $ 132 $ 8,171 Net Preferred earnings 1,429 1, ,479 Other comprehensive shareholders (14) (14) (14) income Common (2) 43 shareholder (551) (551) (551) 2, , , ,693 Balance, end of Dividends year $ 2,414 $ 83 $ 6,050 $ 334 $ 8,881 $ 80 $ 167 $ 9,128 Preferred shareholders (14) (14) (14) Common shareholder (551) December 31, 2013 (551) (551) Balance, end of year $ 2,414 $ 83 $ Accumulated 6,050 $ other 334 $ Total8,881 $ Noncontrolling 80 $ Participating 167 $ 9,128 Share Contributed Accumulated comprehensive shareholders' account Total capital surplus surplus income (loss) equity interests surplus equity 10 Annual Report 2014

13 CONSOLIDATED STATEMENTS OF CASH FLOWS (in Canadian $ millions) CONSOLIDATED STATEMENTS OF CASH FLOWS (in Canadian $ millions) For the years ended December 31 Operations Earnings before income taxes $ 1,722 $ 1,483 For the years ended December 31 Income taxes paid, net of refunds received (233) (252) Adjustments: Change in insurance and investment contract liabilities 5,645 (1,633) Operations Change in funds held by ceding insurers Earnings Change before in funds income held taxes under reinsurance contracts $ 1, $ 1, Income Change taxes in deferred paid, net acquisition of refunds received costs (233) 42 (252) 52 Adjustments: Change in reinsurance assets (550) (106) Change Changes in in insurance fair value and through investment profit or contract loss liabilities (5,374) 5,645 (1,633) 2,018 Change Other in funds held by ceding insurers (23) Change in funds held under reinsurance contracts 2, , Change in deferred acquisition costs Financing Change Activities in reinsurance assets (550) (106) Issue Changes of common in fair shares value through to parent profit company or loss (note 23) (5,374) 2,018 1,412 Repayment Other of debentures and other debt instruments 10 (23) (75) Promissory note payable to parent and affiliate (note 17) 2, ,161 Dividends paid on common shares (551) (388) Financing Dividends Activities paid on preferred shares (14) (259) Issue of common shares to parent company (note 23) (378) 1, Repayment of debentures and other debt instruments (75) Investment Promissory Activities note payable to parent and affiliate (note 17) 187 Dividends Bond sales paid and on maturities common shares 15,175 (551) 9,241 (388) Dividends Mortgage loan paid repayments on preferred shares 618 (14) (259) 525 Stock sales (378) Investment property sales Investment Change in Activities loans to policyholders 14 6 Bond Cash proceeds sales and on maturities loan receivable from affiliate 15, ,241 Mortgage Business acquisition loan repayments 618 (1,234) 525 Stock Investment sales in bonds (16,725) 515 (10,232) 538 Investment Investment property in mortgage sales loans (1,184) 98 (643) 51 Change Investment in loans in stocks to policyholders (379) 14 (518) 6 Cash Investment proceeds in investment on loan receivable properties from affiliate (120) 11 (72) Business acquisition (1,977) (1,234) (2,338) Investment in bonds (16,725) (10,232) Effect Investment of changes in mortgage in exchange loans rates on cash and cash equivalents (1,184) 10 (643) 146 Increase Investment (decrease) in stocks in cash and cash equivalents (379) (249) (518) 659 Investment in investment properties (120) (72) Cash and cash equivalents, beginning of year (1,977) 1,792 (2,338) 1,133 Effect Cash and of changes cash equivalents, in exchange end rates of on year cash and cash equivalents $ 1, $ 1, Supplementary Increase (decrease) cash in flow cash information and cash equivalents (249) 659 Interest income received $ 2,752 $ 2,710 Cash Interest and cash paid equivalents, beginning of year $ 1, $ 1, Cash Dividend and cash income equivalents, received end of year $ 1, $ 1, Supplementary cash flow information Interest income received $ 2,752 $ 2,710 Interest paid $ 39 $ 28 Dividend income received $ 73 $ 60 Annual Report

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in Canadian $ millions except per share amounts) 1. Corporate Information (Canada Life or the Company) is a company incorporated and domiciled in Canada. The registered address of the Company is 330 University Avenue, Toronto, Ontario, Canada, M5G 1R8. Canada Life is a wholly-owned subsidiary of Canada Life Financial Corporation (CLFC). Canada Life is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses, primarily in Canada, Europe and the United States. The consolidated financial statements (financial statements) of the Company as at and for the year ended December 31, 2014 were approved by the Board of Directors on February 11, Basis of Presentation and Summary of Accounting Policies The financial statements of the Company have been prepared in compliance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The financial statements are prepared using International Financial Reporting Standards. Uniform accounting policies were applied in the preparation of the Company's consolidated financial statements. The Company adopted the narrow scope amendments for IAS 32, Financial Instruments: Presentation, IAS 36, Impairment of Assets, and IAS 39, Financial Instruments: Recognition and Measurement as well as the guidance in IFRIC 21, Levies effective January 1, The adoption did not have a significant impact on the Company s financial statements. Basis of Consolidation The consolidated financial statements comprise the financial statements of the Company as at and for the year ended December 31, 2014 with comparatives for December 31, Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The Company has control when it has the power to direct the relevant activities, has significant exposure to variable from these activities and has the ability to use its power to affect the Company's variable returns. All significant intra-group balances, transactions, income and expenses and profits or losses, including dividends resulting from intra-group transactions, are eliminated on consolidation. Use of Significant Judgments, Estimates and Assumptions In preparation of these financial statements, management is required to make significant judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net earnings and related disclosures. Although some uncertainty is inherent in these judgments and estimates, management believes that the amounts recorded are reasonable. Key sources of estimation uncertainty and areas where significant judgments have been made are listed below and discussed throughout the notes to these financial statements including: The actuarial assumptions, such as policyholder behaviour, mortality and morbidity of policyholders, used in the valuation of insurance and investment contract liabilities under the Canadian Asset Liability Method (note 15). Management uses judgment to evaluate the classification of insurance and reinsurance contracts to determine whether these arrangements should be accounted for as insurance, investment or service contracts. 12 Annual Report 2014

15 2. NOTES Basis of TO Presentation CONSOLIDATED and Summary FINANCIAL of Accounting STATEMENTS Policies (cont'd) Management evaluates the synergies and future benefit for initial recognition and measurement of goodwill and intangible assets as well as testing the recoverable amounts. The determination of the carrying value and recoverable amounts of goodwill and intangible assets relies upon the use of forecasts of future financial results (note 11). Cash generating units for goodwill and indefinite life intangible assets have been determined by management as the lowest level that the goodwill is monitored for internal reporting purposes, which requires management judgment in the determination of the lowest level of monitoring (note 11). Legal and other provisions are recognized resulting from a past event which, in the judgment of management, has resulted in a probable outflow of economic resources which would be passed to a thirdparty to settle the obligation. Management uses judgment to evaluate the possible outcomes and risks in determining the best estimate of the provision at the balance sheet date (note 32). The Company operates within various tax jurisdictions where significant management judgments and estimates are required when interpreting the relevant tax laws, regulations and legislation in the determination of the Company s tax provisions and the carrying amounts of its tax assets and liabilities (note 29). The actuarial assumptions used in determining the expense and defined benefit obligations for the Company s pension plans and other post-employment benefits. Management reviews previous experience of its plan members and market conditions including interest rates and inflation rates in evaluating the assumptions used in determining the expense for the current year (note 26). Management consolidates all subsidiaries and entities in which it is determined that the Company controls. Control is evaluated on the ability of the Company to direct the activities of the subsidiary or entity to derive variable returns and management uses judgment in determining whether control exists. Judgment is exercised in the evaluation of the variable returns and in determining the extent to which the Company has the ability to exercise its power to generate variable returns. In the determination of the fair value of financial instruments, the Company's management exercises judgment in the determination of fair value inputs, particularly those items categorized within level 3 of the fair value hierarchy including the significant unobservable inputs used in measuring investment properties (note 8). Management uses independent qualified appraisal services which include judgments and estimates. These appraisals are adjusted by applying management judgments and estimates for material changes in property cash flows, capital expenditures or general market conditions in determining the fair value of investment properties (note 5). Management uses judgments, such as the risks and benefits associated with the transaction that are used in determining whether the Company retains the primary obligation with a client in sub-advisor arrangements. Where the Company retains the risks and benefits, revenue and expenses are recorded on a gross basis. Within the Consolidated Statements of Cash Flows, purchases and sales of portfolio investments are recorded within investment activities due to the long-term nature of these investing activities. Judgments are used by management in determining whether deferred acquisition costs and deferred income reserves can be recognized on the Consolidated Balance Sheets. Deferred acquisition costs are recognized if management determines the costs meet the definition of an asset and are incremental and related to the issuance of the investment contract. Deferred income reserves are amortized on a straightline basis over the term of the policy (notes 13 and 19). The operating segments of the Company, which are the segments reviewed by the Company s Chief Executive Officer to assess performance and allocate resources within the Company. Management applies judgment in the aggregation of the business units into the Company's operating segments (note 34). The results of the Company reflect management s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. The provision for future credit losses within the Company's insurance and investment contract liabilities relies upon investment credit ratings. The Company s practice is to use third party independent credit ratings where available. Annual Report

16 NOTES 2. Basis of TO Presentation CONSOLIDATED and Summary FINANCIAL of Accounting STATEMENTS Policies (cont'd) The significant accounting policies are as follows: (a) Portfolio Investments Portfolio investments include bonds, mortgage loans, stocks, and investment properties. Portfolio investments are classified as fair value through profit or loss, available-for-sale, held-to-maturity, loans and receivables or as non-financial instruments based on management s intention relating to the purpose and nature of the instrument or characteristics of the investment. The Company currently has not classified any investments as held-to-maturity. Investments in bonds and stocks normally actively traded on a public market are either designated or classified as fair value through profit or loss or classified as available-for-sale on a trade date basis. A financial asset is designated as fair value through profit or loss on initial recognition if it eliminates or significantly reduces an accounting mismatch. Changes in the fair value of financial assets designated as fair value through profit or loss are generally offset by changes in insurance contract liabilities, since the measurement of insurance contract liabilities is determined with reference to the assets supporting the liabilities. A financial asset is classified as fair value through profit or loss on initial recognition if it is part of a portfolio that is actively traded for the purpose of earning investment income. Fair value through profit or loss investments are recognized at fair value on the Consolidated Balance Sheets with realized and unrealized gains and losses reported in the Consolidated Statements of Earnings. Available-for-sale investments are recognized at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in other comprehensive income. Realized gains and losses are reclassified from other comprehensive income and recorded in the Consolidated Statements of Earnings when the available-for-sale investment is sold. Interest income earned on both fair value through profit or loss and available-for-sale bonds is recorded as net investment income in the Consolidated Statements of Earnings. Investments in equity instruments where a fair value cannot be measured reliably are classified as availablefor-sale, carried at cost and fair value disclosure is not applicable. Investments in stocks for which the Company exerts significant influence over but does not control are accounted for using the equity method of accounting. Investments in stocks include the Company s investment in Allianz Ireland, an unlisted general insurance company operating in Ireland, over which the Company exerts significant influence but does not control. The investment is accounted for using the equity method of accounting. Investments in mortgages and bonds not normally actively traded on a public market are classified as loans and receivables and are carried at amortized cost net of any allowance for credit losses. Interest income earned and realized gains and losses on the sale of investments classified as loans and receivables are recorded in the Consolidated Statements of Earnings and included in net investment income. Investment properties are real estate held to earn rental income or for capital appreciation. Investment properties are initially measured at cost and subsequently carried at fair value on the Consolidated Balance Sheets. All changes in fair value are recorded as net investment income in the Consolidated Statements of Earnings. Fair values for investment properties are determined using independent qualified appraisal services and include management adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals. Properties held to earn rental income or for capital appreciation that have an insignificant portion that is owner occupied or where there is no intent to occupy on a long-term basis are classified as investment properties. Properties that do not meet these criteria are classified as owner occupied properties. Property that is leased that would otherwise be classified as investment property if owned by the Company is also included within investment properties. Fair Value Measurement Financial instrument carrying values necessarily reflect the prevailing market liquidity and the liquidity premiums embedded within the market pricing methods that the Company relies upon. 14 Annual Report 2014

17 NOTES 2. Basis of TO Presentation CONSOLIDATED and Summary FINANCIAL of Accounting STATEMENTS Policies (cont'd) The following is a description of the methodologies used to value instruments carried at fair value: Bonds - Fair Value Through Profit or Loss and Available-for-Sale Fair values for bonds classified as fair value through profit or loss or available-for-sale are determined with reference to quoted market bid prices primarily provided by third party independent pricing sources. Where prices are not quoted in a normally active market, fair values are determined by valuation models. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company obtains quoted prices in active markets, when available, for identical assets at the balance sheet date to measure bonds at fair value in its fair value through profit or loss and available-for-sale portfolios. The Company estimates the fair value of bonds not traded in active markets by referring to actively traded securities with similar attributes, dealer quotations, matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the issuer's industry, the security's rating, term, coupon rate and position in the capital structure of the issuer, as well as, yield curves, credit curves, prepayment rates and other relevant factors. For bonds that are not traded in active markets, valuations are adjusted to reflect illiquidity, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used. Stocks - Fair Value Through Profit or Loss and Available-for-Sale Fair values for public stocks are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for stocks for which there is no active market are determined by discounting expected future cash flows. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company obtains quoted prices in active markets, when available, for identical assets at the balance sheet date to measure stocks at fair value in its fair value through profit or loss and available-for-sale portfolios. Mortgages and Bonds - Loans and Receivables For disclosure purposes only, fair values for bonds and mortgages classified as loans and receivables are determined by discounting expected future cash flows using current market rates. Valuation inputs typically include benchmark yields and risk-adjusted spreads based on current lending activities and market activity. Investment Properties Fair values for investment properties are determined using independent qualified appraisal services and include management adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals. The determination of the fair value of investment property requires the use of estimates including future cash flows (such as future leasing assumptions, rental rates, capital and operating expenditures) and discount, reversionary and overall capitalization rates applicable to the asset based on current market conditions. Investment property under construction is valued at fair value if such values can be reliably determined otherwise they are recorded at cost. Impairment Investments are reviewed regularly on an individual basis to determine impairment status. The Company considers various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults and delinquency in payments of interest or principal. Investments are deemed to be impaired when there is no longer reasonable assurance of timely collection of the full amount of the principal and interest due. The fair value of an investment is not a definitive indicator of impairment, as it may be significantly influenced by other factors including the remaining term to maturity and liquidity of the asset. However market price is taken into consideration when evaluating impairment. Annual Report

18 2. Basis of Presentation and and Summary of Accounting of Accounting Policies Policies (cont'd)(cont d) For impaired mortgages and bonds classified as loans and receivables, provisions are established or writeoffs made to adjust the carrying value to the net realizable amount. Wherever possible the fair value of collateral underlying the loans or observable market price is used to establish net realizable value. For impaired availablefor-sale loans, recorded at fair value, the accumulated loss recorded in accumulated other comprehensive income is reclassified to net investment income. Impairments on available-for-sale debt instruments are reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bonds classified or designated as fair value through profit or loss are already recorded in net investment income, therefore a reduction due to impairment of these assets will be recorded in net investment income. As well, when determined to be impaired, interest is no longer accrued and previous interest accruals are reversed. Fair value movement on the assets supporting insurance contract liabilities is a major factor in the movement of insurance contract liabilities. Changes in the fair value of bonds designated or classified as fair value through profit or loss that support insurance and investment contract liabilities are largely offset by corresponding changes in the fair value of liabilities except when the bond has been deemed impaired. Securities Lending The Company engages in securities lending through its securities custodians as lending agents. Loaned securities are not derecognized, and continue to be reported within invested assets, as the Company retains substantial risks and rewards and economic benefits related to the loaned securities. (b) Transaction Costs Transaction costs are expensed as incurred for financial instruments classified as fair value through profit or loss. Transaction costs for financial assets classified as available-for-sale or loans and receivables are added to the value of the instrument at acquisition and taken into net earnings using the effective interest rate method. Transaction costs for financial liabilities classified as other than fair value through profit or loss are included in the value of the instrument issued and taken into net earnings using the effective interest rate method. (c) Cash and Cash Equivalents Cash and cash equivalents comprises cash, current operating accounts, overnight bank and term deposits with original maturities of three months or less held for the purpose of meeting short-term cash requirements. Net payments in transit and overdraft bank balances are included in other liabilities. The carrying value of cash and cash equivalents approximates their fair value. (d) Trading Account Assets Trading account assets consist of investments in open ended investment companies and sponsored unit-trusts in Europe, which are carried at fair value based on the net asset value. Investments in these assets are included in other assets on the Consolidated Balance Sheets with realized and unrealized gains and losses reported in the Consolidated Statements of Earnings. (e) Debentures and Other Debt Instruments and Capital Trust Securities Debentures and other debt instruments and capital trust securities are initially recorded on the Consolidated Balance Sheets at fair value and subsequently carried at amortized cost using the effective interest rate method with amortization expense recorded in the Consolidated Statements of Earnings. These liabilities are derecognized when the obligation is cancelled or redeemed. (f) Other Assets and Other Liabilities Other assets, which include prepaid expenses, deferred acquisition costs and miscellaneous other assets, are measured at amortized cost. Other liabilities, which include, deferred income reserves and bank overdraft, are measured at amortized cost. Pension and other post-employment benefits also included within other assets and liabilities are measured in accordance with IAS 19, Employee Benefits. 16 Annual Report 2014

19 2. Basis of Presentation and and Summary of Accounting of Accounting Policies Policies (cont'd)(cont d) (g) Participating Account The Company accounts are comprised of two main sub-divisions, the Participating Account and the Shareholder Account. The liabilities for participating policies issued or assumed by the Company prior to demutualization are held in closed block sub-accounts. These liabilities for guaranteed and other non-guaranteed benefits are determined using best estimate assumptions. If at any time the value of the assets allocated to these policies were, in the opinion of the Appointed Actuary, less than the assets required in the long term to support the liabilities of these policies and the future reasonable expectations of the policyholders, assets having a sufficient value to rectify the situation would be transferred first from the additional ancillary sub-accounts maintained in the participating account for this purpose and then, if the deficiency is expected to be permanent, from the shareholder account. Any such transfers from the shareholder account would be recorded as a charge to shareholder net earnings. The second main division comprises the open block sub-accounts containing all liabilities in respect of new participating policies issued on or after demutualization. On demutualization, $50 of seed capital was transferred from shareholder surplus to the participating account. The seed capital amount, together with a reasonable rate of return, may be transferred to the shareholder account if the seed capital is no longer required to support the new participating policies. Transfers of seed capital to the shareholder account would be returns of capital and would be recorded as adjustments to shareholder surplus. A reasonable rate of return on seed capital is recognized as income on the shareholder account and as an expense in the participating account when paid. To date all seed capital has been repaid except for $17 (U.S. $15). (h) Derivative Financial Instruments The Company uses derivative products as risk management instruments to hedge or manage asset, liability and capital positions, including revenues. The Company s policy guidelines prohibit the use of derivative instruments for speculative trading purposes. The Company includes disclosure of the maximum credit risk, future credit exposure, credit risk equivalent and risk weighted equivalent in note 31 as prescribed by the Office of the Superintendent of Financial Institutions Canada. All derivatives including those that are embedded in financial and non-financial contracts that are not closely related to the host contracts are recorded at fair value on the Consolidated Balance Sheets. The method of recognizing unrealized and realized fair value gains and losses depends on whether the derivatives are designated as hedging instruments. For derivatives that are not designated as hedging instruments, unrealized and realized gains and losses are recorded in net investment income on the Consolidated Statements of Earnings. For derivatives designated as hedging instruments, unrealized and realized gains and losses are recognized according to the nature of the hedged item. Derivatives are valued using market transactions and other market evidence whenever possible, including market based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value a derivative depends on the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. To qualify for hedge accounting, the relationship between the hedged item and the hedging instrument must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, the relationship does not qualify for hedge accounting treatment and both the hedged item and the hedging instrument are reported independently as if there was no hedging relationship. Annual Report

20 2. Basis of Presentation and and Summary of Accounting of Accounting Policies Policies (cont'd)(cont d) Where a hedging relationship exists, the Company documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking derivatives that are used in hedging transactions to specific assets and liabilities on the Consolidated Balance Sheets or to specific firm commitments or forecasted transactions. The Company also assesses, both at the hedge s inception and on an ongoing basis, whether derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. Hedge effectiveness is reviewed quarterly through correlation testing. Derivatives not designated as hedges for accounting purposes For derivative investments not designated as accounting hedges, changes in fair value are recorded in net investment income. Fair value hedges For fair value hedges, changes in fair value of both the hedging instrument and the hedged risk are recorded in net investment income and consequently any ineffective portion of the hedge is recorded immediately in net investment income. The Company currently uses interest rate swaps designated as fair value hedges. Cash flow hedges For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is recorded in the same manner as the hedged item in other comprehensive income while the ineffective portion is recognized immediately in net investment income. Gains and losses that accumulate in other comprehensive income are recorded in net investment income in the same period the hedged item affects net earnings. Gains and losses on cash flow hedges are immediately reclassified from other comprehensive income to net investment income if and when it is probable that a forecasted transaction is no longer expected to occur. Net investment hedges For net investment hedges the effective portion of changes in the fair value of the hedging instrument are recorded in other comprehensive income while the ineffective portion is recognized immediately in net investment income. Hedge accounting is discontinued when the hedging no longer qualifies for hedge accounting. (i) Embedded Derivatives An embedded derivative is a component of a host contract that modifies the cash flows of the host contract in a manner similar to a derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. Embedded derivatives are treated as separate contracts and are recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself recorded at fair value through the Consolidated Statements of Earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract. (j) Foreign Currency Translation The Company operates with multiple functional currencies. The Company s consolidated financial statements are presented in Canadian dollars as this presentation is most meaningful to financial statement users. For those subsidiaries with different functional currencies, exchange rate differences arising from the translation of monetary items that form part of the net investment in the foreign operation are taken to unrealized foreign exchange gains (losses) on translation of foreign operations in accumulated other comprehensive income. 18 Annual Report 2014

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